Determine appropriate bin. All statements should be placed If the statements bel

Question

Determine appropriate bin. All statements should be placed If the statements below describe monetary palicy or fiscal policy; place each statement in the Monetary Policy To limit the impact of a recession Canada's money supply of the United States, decreased the Fiscal Policy the Bank of Cana increased taxes to fight inflation ased Federal Reserve, the central bank Provindial govemment speding in Nova Scotla pending in Nova Scotia U.S. money supply because of an increasing aggregate price leve increased to create new jobs in the fishing industry Previous Check Answer Next nt DOLL

Explanation / Answer

Fiscal Policy is choice of government taxes and government spending to influence the economy. It influences and tries to stabilise the economy by either increasing/decreasing taxes or by increasing or decreasing it's spending.

For example: When government increases it's spending or decreases the taxes (which leads to increase in people's spending and consumption), it causes an increase in Aggregate demand. Increase in aggregate demand could lead to various outcomes. It could increase employment as more demand means firms want to produce more and hence they will employ more. Or it could lead to increase in inflation as current supply could not meet the higher aggregate demand and hence price will rise, etc.

Monetary Policy is a tool where the Central Bank tries to influence the economy by changing the Money supply in the economy. One way to do so would be buying or selling bonds. When it wants to expand the money supply in the economy, it will buy bonds (because people will exchange bonds for money and hence people will now have more money on their hands). This is called expansionary policy. If Central bank wants to reduce money supply, it will sell bonds and this is called contractionary policy.

Change in Money supply affects the economy. For example, if money supply is increased, people will buy more goods as they have more money, and aggregate demand is increased. This is will lead ti inflation and increase in employment as we have seen above.

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To limit the impact of recession, Bank of Canada increased Canada's money supply is monetary policy. This is because the central bank is trying to affect the economy and in this case trying to uplift it using money supply as a tool. Increase in money supply will increase the aggregate demand. Prices will rise because supply is not enough to meet the demand. Hence firms will respond to growing prices by producing more, which they will do by employing more people. Hence employment will increase. Increase in employment will lead to people having more income and hence increased spending and consumption which again will lead to a cycle of growth and potentially lead to decrease in recession.

The Federal reserve decreased US money supply because of an increasing price level is a monetary policy. Again we see here that the government is trying to affect the economy, that is the price level or inflation using money supply as tool. By decreasing money supply, it is reducing money people have, which will lead to people spending less. This will cause a decrease in demand as compared to supply, and firms will try to clear the market by reducing prices.

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Canada's federal government increased taxes to fight inflation is a fiscal policy. This is because in order to affect the economy, governemt is using taxes as a tool. When taxes are increased, people will have less dosposable income , or income after paying taxes, left. Therefore they will respond by decreasing their demand. When demand decreases, there will be excess supply in the market and producers will reduce their prices to clear the market. Therefore prices will go down and inflation will decrease.

Provincial spending in nova soctia increased to create new jobs in the fishing industry. This is again fiscal policy because government is using government spending as tool to affect the economy and in this case the employment. Increase in government spending means that demand has increased (government will spend on goods and infrastructure, leading to an increase in demand). Increase in demand will lead to shortage in supply. Prices will increase as a result and firms will respond by increasing production to benefit from increased prices. They will do so by employing more people and therefore employment is will increase.

*Therefore all statements are in the correct bin.

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